Apple shares fall as analysts question iPhone pricing

MarketWatchSeptember 12, 2013 

SAN FRANCISCO -- Apple Inc. managed to wow the crowds with the high-end specs on its newest iPhone 5S, but analysts worry that the company is pricing its new lower-end device too high to grow its share in those segments that of the smartphone market that offer the most potential.

At least, that's been the early take from analysts who were watching Apple's unveiling of its latest pair of iPhones on Tuesday.

By Wednesday's opening bell, three brokers -- Bank of America-Merrill Lynch, Credit Suisse and UBS -- had downgraded their ratings on Apple to the equivalent of neutral. All cited the high price of the iPhone 5C as a challenge for Apple in expanding its market share. Apple's shares slid by 5.4 percent to close at $467.71.

As expected, the company said Tuesday it plans to launch the iPhone 5S as its newest device for high-end users, who may be turned on by its fingerprint scanner and powerful, 64-bit processor.

Also as expected, the company launched the multi-colored iPhone 5C with a starting price of $99 in the U.S. for users who sign a two-year contract.

The iPhone 5C was expected to represent Apple's foray into the low-price segment of the smartphone market, particularly in places such as China. But few analysts so far believe that the phone at its current price will work in those tiers.

The Apple website has the iPhone 5C at the equivalent of $733 without a contract -- far above the $400 that

many analysts believed was the highest that Apple could go and still appeal in a market such as China.

The pricing of the iPhone 5C -- which is essentially the iPhone 5 in a plastic casing -- is on par with the expected price for the iPhone 5 after the introduction of the 5S, based on the company's past practices of cutting the price of its current model when a new one is launched.

"It's the same pricing scheme as the prior generation -- they made no concessions," Glen Yeung of Citigroup told MarketWatch. "They were consistent if nothing else, but it does nothing for them in going after emerging markets."

Peter Misek of Jefferies & Co. said that the price of the iPhone 5C in China is especially high, considering the country's gross domestic product per family of around $5,000. He told MarketWatch that Apple was "doubling down on the high end" rather than trying to expand its market to a broader array of customers.

"It makes no sense," he said.

Analysts believe it's important for Apple to expand its market, given that the company's sales growth has been slowing as the iPhone -- which comprises more than half of Apple's overall revenue -- is facing saturation in the high end of the smartphone market.

IDC predicts that smartphones priced in the $100-$200 price range will grow to 37 percent of the global smartphone market by 2017, compared to 25 percent last year. Phones in the $550-$700 range are expected to drop from nearly 18 percent of sales last year to less than 10 percent by 2017.

Before Tuesday's event, Apple's share price had surged more than 20 percent in the previous two months, with much of the positive sentiment fueled by leaks and speculation that the company was developing the iPhone 5C to expand its markets.

Even analysts bullish on Apple have concerns about the price point. Gene Munster, who rates Apple's shares as a buy, wrote to clients on Tuesday that "the cheaper 5C turned out to be targeted at a different price range than we expected."

Noting that the unlocked price of the iPhone 5C was more than 80 percent above his projection, Munster said Apple may instead use the iPhone 4S for the lower end of the markets.

But he said the price of the handset "means that our total iPhone unit estimates and overall margin for (calendar years) 2014/15 may need revision, given our prior expectation of a $300 phone with a lower margin."

Abhey Lamba, a senior technology analyst at Mizuho Securities, said in a note that he is keeping his buy rating and $520 price target on Apple. He thinks the company faces hurdles in further penetrating the China market owing to too-pricey phones, but is also looking further down the pipeline with some optimism.

"While the iPhone 5S and 5C product cycle will likely not be strong, we expect iPhone 6 by the middle of 2014, which should drive significant upgrade activity at the high end," said Lamba. "We believe product cycle in the iPhone category combined with a refresh in the tablet space during the holiday season should act as a catalyst."

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